~EC1~11lED D~:C ` 0 2x19 UNITED STATES OF AMERICA OFFICEOFTHESECRrTARY before the S ECURITIES AND EXCHANGE COMMISSION In The Matter of the Application of: B LOOMBERG L.P. rldmin. Proc. File No. R elease No. 87656 Petition of Bloomberg, L.P. for review of an Order, taken by delegated authority, granting approval of a Proposed Rule
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Petition of Bloomberg, L.P. for review of an Order, taken by … · 2020-01-17 · PETITION FOR REVIEW Under SEC Rules of Practice 430 and 431, Bloomberg, L.P. ("Bloomberg") hereby
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~EC1~11lED
D~:C 0 2x19UNITED STATES OF AMERICA OFFICEOFTHESECRrTARY
before theSECURITIES AND EXCHANGE COMMISSION
In The Matter of the Application of:
BLOOMBERG L.P.
rldmin. Proc. File No.
Release No. 87656
Petition of Bloomberg, L.P. for review of an Order, taken by delegated authority,
granting approval of a Proposed Rule
TABLE OF CONTENTS
Page
I. INTRODUCTION ............................................................................................................................1
II. FINRr,'S (AMENDED) PROPOSE-~L ............................................................................................2
III. STANDING ........................................................................................................................................6
IV. STANDARD FOR GRr1NTING THE PETITION ...................................................................7
V. REr1SONS FOR GRANTING THE PETITION .......................................................................9
A. FINRi~'s creation of a mandatory bond-data "utility" represents an "exerciseof discretion or decision of law or policy that is important and that theCommission should review." ...............................................................................................9
B. The Order embodies erroneous conclusions of law and clearly erroneousconclusions of material fact ............................................................................................... 10
1. By omitting fees, the FINRc1 Order precluded Commission approvalunder ~ 15~(b)(5) .................................................................................................. 11
a. The Order failed to make a statutorily required finding thatfees and costs are reasonable and equitably allocated ........................ 12
b. The Order improperly relied on an SRO's unsupported andself-interested representations ............................................................... 13
c. By segregating and delaying the fee justification, the FINRr1Proposal would risk imposing immediately effective fees onunwitting market participants before Commission approval............ 14
d. The Order could not adequately assess the Proposal's costsand benefits without crucial fee and cost information ...................... 17
2. The Order violated ~ 15A(b)(6) because the Proposal does notpromote equitable trade or foster cooperation in the handling ofmarket information ............................................................................................... 19
a. No market failure justifying a coercive regulatory utility ................... 20
b. The Order ignores recent data indicating electronic bondtrading is flourishing under the current regime .................................. 22
c. The Order fails to address inaccuracies in FINR~1's currentdata............................................................................................................ 23
d. The Order creates a commercial conflict for a public
a. The Proposal would, by its very design, "supplant demand"for bond reference data .......................................................................... 29
-i-
TABLE OF CONTENTS
(continued)
Page
b. The Proposal would chill innovation and investment in
market-data services, undermining the Exchange Act's goal of
broad dissemination and access ............................................................ 30
c. The Division did not actually estimate the costs and benefits.......... 32
VI. CONCLUSION ............................................................................................................................... 33
-ll-
PETITION FOR REVIEW
Under SEC Rules of Practice 430 and 431, Bloomberg, L.P. ("Bloomberg") hereby asks the
Commission to review and reverse the decision of the Division of Trading and Markets, issued on
December 4, 2019, Exchange r'~ct Release No. 87656 ("Order"). The Division issued this Order
pursuant to delegated authority, 17 C.F.R. ~ 200.30-3(a)(12), approving a proposal by FINRA (the
"Proposal") to establish a new issue corporate bond reference database. See File No. SR-FINRA-2019-
approval. The Division also purported to assess the competitive impact of the Proposal, under
~ 15A(b)(6), but never acknowledged the most significant effect on data providers—the loss of their
e~cisting business regarding corporate bond reference data. Nor could the Order include a reasonable
assessment of costs and benefits by considering its upside alone. See Exchange rlct ~ 15A(b)(9). These
concerns amply warrant the Commission's review under Rule 411(b)(2)(u).
1. By omitting fees, the FINRA Order precluded Commission approval
under ~ 15A(b)(5).
FINRc1 initially set forth an arbitrary and unsupported schedule of charges: $250 per month
for a user that does not disseminate the data, and $6,000 per month for a user that does. FINRr~
asserted that these prices rested on costs. Proposal at 13. But the price schedule was unaccompanied
by any evidence of expected costs, relevant inputs, anticipated demand, or any other basis for
estimating those purportedly cost-based charges. Many commenters criticized this position, see Order
at n.21, particularly in light of recent Commission rulings, litigation positions, and staff guidance.'
See, e.g., In re SIFMA, Release No. 34-84432 (Oct. 16, 2018); In re BOX, Release No. 34-85459 (Mar.
29, 2019), at 23; Staff Guidance on SRO Rule Filings Relating to Fees (May 21, 2019). Even if FINRA's
revenue proves lower than its costs, moreover, section 15r1(b)(5) would not permit FINRA to
undercharge bond-reference data customers thanks to a subsidy from fees paid by other market
participants.
11
Rather than respond with data and reasoning, however, FINRc1 merely "represented" that a
"separate fee filing" would be submitted "at a future date" and impose a fee schedule consistent with
a "regulatory utility" model. Order at 50, 53. The Order below simply accepted the truncated Proposal
on this basis. Lacking any information about costs or fees, the Order sidestepped the Commission's
obligation to find that the Proposal's costs and fees would be reasonable—and then approved the
Proposal anyway. That decision was wrong for at least four reasons.
a. The Order failed to make a statutorily required finding that fees and
costs are reasonable and equitably allocated. Under ~ 15r~(b)(5), the Comnussion cannot approve
the Amendment because FINRr~ has not "provide[d] for the equitable allocation of reasonable dues,
fees, and other charges among members and issuers and other persons using any facility or system
which FINRi~ operates or controls." 15 U.S.C. ~ 78o-3(b)(5). according to the Order Instituting
Proceedings in this case, "Section 15A(b)(5) of the Act regarires that the rules of a narional securities
association provide for the equitable allocation of reasonable dues, fees, and other charges among
members and issuers and other persons using any facility or system which the association operates or
controls." ~ 78s(b)(2)(B) (emphasis added).3 Indeed, Congress mandated that "the Commission shall
disapprove a proposed rule change ... if it does not make a fznding" that the rule change is "consistent with"
~~ 15A(b)(5) and, as relevant, (b)(6) and (b)(9). ~ 78s(C).
The FINRA Order erred in purporting to approve the Proposal without making the required
finding regarding FINRr~'s fees. To the extent the Order suggests that requirement applies only to a
' The Order (at pp. 7-8) provided that:
"In particular, the Comn-ussion is instituting proceedings to allow for additional analysis of theproposed rule change's consistency with: (1) Section 15A(b)(5) of the Act, which requires,among other things, that FINRt1 rules provide for the equitable allocation of reasonable duesfees and other charges among members and issuers and other persons using any facility or
system which FINRi~ operates or controls ...."
12
"proposed fee filing," Order at 52, it is wrong. Section 15A(b)(5 is not so limited; it applies to all"[t]he
rules of the association." 15 U.S.C. ~ 78o-3(b)(5). On its face, therefore, the Order violates ~ 15A(b)(5)
by failing to offer any assessment or finding regarding the new fees.{ (The Order is also necessarily
arbitrary and capricious based on that failure to confront an important aspect of the problem. See, e.g.,
State Farm, 463 U.S. at 43.) On this basis alone, the Order violates the plain terms of the Exchange
Act and cannot be approved.
b. The Order improperly relied on an SRO's unsupported and self-
interested representations. The Order's fee consideration erred for the independent reason that it
placed unquestioning reliance on FINRr1's representation that its future fee structure would reflect a
"regulatory utility" model. Order at 53 ("FINRr1 has stated that the proposal was modeled as a
regulatory utility."); see also id. at 18, 54.' Indeed, by the Division's own admission, the Order's entire
reasoning—with respect to cost/benefit impact, competition, burden on underwriters, and capital
formation—rests on this unsupported and unelaborated statement: "The Commission's consideration
of the proposal, including the burden on underwriters, the proposal's impact on competition among
market participants, including other data vendors, and its impact on efficiency and capital formation,
is based upon the understanding that the fees assessed will be consistent with these representations."
I~l at 53. It was only "based on that understanding" that the Commission could "fin[d] that the
proposal is consistent with the Act." I~
This is far too slender a reed on which to rest so significant an expansion of FINRc1's intrusion
Even if the Commission were to determine the fees were reasonably related to the costs of operating
a "regulatory utility," nothing in the rlct suggests the costs of a utility (often inefficient and subject to
review for this very reason) are automatically reasonable and equitably allocated. The Order simply
reflected no information on this point at all.
' FINRA's latest Oct. 29 submission, however, used this term only once. Ellenberg letter at 10.
Notably, FIMSAC and FINRA originally proposed "commercially reasonable" fees based on "cost
plus margin" pricing. See Test of Proposed Rule Change at 10, 15, 34, available athttps://www.finra.org/sites/default/files/rule_filin~file/SR-FINRr1-2019-008.pdf; FIMSAC
13
into the marketplace. FINRA's "mere assertion" that the prices will be based on its own cost "is not
sufficient," 17 C.F.R. ~ 201.700(b)(3), as evidenced by the Commission's recent and repeated (and
correct) refusals to approve fee filings that lacked evidentiary support.`' See, e.g., In re BOX, Release No.
34-85459, at 12, 22-23 (Commission "cannot have an `unquestioning reliance' on an SRO's
representations in a proposed rule change") (quoting Sarsgzref~anna, 866 Fad at 446-47).
c. By segregating and delaying the fee justification, the FINRA Proposal
would risk imposing immediately effective fees on unwitting market participants before
Commission approval. Approving afee-dependent order without knowing the fees is problematic
for a separate procedural reason: it potentially allows SROs to impose "immediately effective" fees
before they have been scrutinized by the Commission or even noticed to market participants. The
careful wording of FINRA and the Order are noteworthy here: "FINR11 stated that any new fees
would be filed avith [not approved by] the Commission in advance of the implementation [not after the notice-
recommendation at 1. This made little sense, given the lack of any commercial or historical benchmark
for costs or margins associated with a centralized source of information commandeered from
underwriters. Suffice it to say, neither FINRr1 nor the Order offered any argument that FINRi1 can
lawfully claim a "margin" on its sale of data commandeered from its regulated members and re-sold
to many of those same members.
~YThatever the "regulatory utility" model might ultimately resemble, it must at a minimum
include information regarding the cost of building and operating a new reference data service (not to
mention underwriters' costs of infrastructure and compliance, which may be incurred even before any
fee filing). To date, FINRc~ has not offered the roughest appro:cimation of that cost. If they are high—
exceeding what the market will bear in fees or what FINRc1's operating budget will support—it is
hard to imagine FINRr1 ever surviving the Commission's cost-benefit review. rind under Commission
and D.C. Circuit precedent, the Commission cannot approve the program without cost information:
as with the consolidated core data subject to single-source collection and distribution by the SIPs, no
one has ever claimed FINRA's centralized fees would be disciplined by market competition.
~ See, e.g., In re Bloomberg, Release No. 34-83755 (July 31, 2018), at 14-16; In re SIf'NIA, Release No. 34-
84432 (Oct. 16, 2018), at 17-54; In re BOX, Release No. 34-85459 (Mar. 29, 2019), at 23. FINR~'s
proposal certainly fared no better. See, e.g., In re BOX, Release No. 34-85459, at 12, 22-23 (Commission
"cannot have an unquestioning reliance' on an SRO's representations in a proposed rule change")
(quoting Susquehanna, 866 Fad at 446-47).
14
and-comment period] of the newly issued corporate bond new issue reference data service." Order at
21-22. Had FINR~ left the fees in its Proposal, the fees would have been subject to the Corrunission's
regular approval process before implementation. But by segregating the fees and taking advantage of
the "effective-upon-filing" provision for market-data fees,' FINR~1 could potentially impose entirely
new fees without any affirmative SEC approval: the fees could take effect immediately and persist
unless the Commission intervened to suspend them.
As the Commission has recognized in the context of SIP fee filings under Rule 608, this
effective-upon-filing regime has pernicious effects." Nor are those mitigated by the mere opportunity
for payors to participate in anotice-and-comment process whose default allows the fees to remain in
effect absent Commission intervention. In a practical sense, the burden of action would now fall on
the Commission and objecting market participants, not on FINRc1.'' t1 world of difference separates
Whether FINRc1 intends to file its fees as effective upon filing, and whether the Commission would
tolerate that approach, remains unclear. The Order (at p. 52) states that "[rJegardless of whether a fee
proposed by FINRc1 is effective upon filing with the Commission, the Commission assesses whether
or not the fee proposal is consistent with the r1ct." This uncertainty embedded in both FINRA's
Proposal and the Division's Order is itself a question justifying the Commission's review of this
unorthodox proceeding.
" See Notice of Proposed Rulemaking, Resczscion of Effective-Upon-Filing Proceclrsre for NMS Plan Fee
Amendments (Exchange rlct Release No. 34-87193; File Number S7-15-19).
~ Although the legal burden for justifying a fee filing technically remains with the SRO, Order at 51,
the practical burden changes significantly under "Rule 608's immediate-effectiveness regune," which
"effectively flips that burden." Comment letter from G. Babyak, Release No. 34-87193 (Dec. 10,
2019). r1s Bloomberg explained in the Rule 608 context, that process:
allows fees to take effect without a Commission determination that the ... Plan has met its
burden. Indeed, the burden counterintuitively falls on the Commission to take action to
intervene and disturb the new status quo as dictated by the NMS Plan. end if the Commission
exercises its limited resources to review and suspend any fee or instituting proceedings, like
any agency, it does so subject to reasoned decision-making requirements. In effect, the Plan's
burden to justify a fee transforms into the agency's burden to justify a suspension.
Id. (citations omitted). FINRA's strategic omission could achieve the same result here.
15
affirmative Commission approval before a new fee takes effect, on the one hand, and FINRt1's mere
obligation not to "charge fees for the proposed data service until the Corrunission receives a proposed nrle
change that complier ~vit~i the Act and Commission r~rles concerning proposed fee changes." Id. at 50 (emphasis
added). SROs surely always believe their fees comply with the rlct when submitted, but that has not
stopped the Commission from disagreeing when put to the question. See infra nn.2, 5 (collecting
examples). FINRr1 should not be allowed to circumvent the Act's requirement of an affirmative
finding of compliance with ~ 15t1(b)(5) by dodging the many comments critical of its unjustified fees.
Gerrymandering a decision to avoid its most cosily and controversial component is plainly not
what the law demands of agencies in reviewing and justifying their actions. The D.C. Circuit's recent
decision in Carlson v. Postal Begarlatory Commi~~~ion illustrates the point. No. 18-1328, 2019 U.S. r1pp.
Lexis 27630 (D.C. Cir. Sep. 13, 2019). Lacking a contemporaneous justification for a rate hike, the
Commission contended it could satisfy the statute "by deferring consideration of the statutory factors
and objectives" until a later time. This flipped the burden in the favor of the agency and against the
rate-paying public: "post-implementation review of rates shifts the burden of proof to the public to
demonstrate the unreasonableness of rates that have already been adopted, instead of requiring the
Commission to demonstrate through reasoned rulemaking that its proposed rates comply with the
APA ...." Id. (ciring Nat'l LimeAsr'n v. EPA, 627 F.2d 416, 433 (D.C. Cir. 1980)) ("[A]n inirial burden
of promulgating and explaining anon-arbitrary, non-capricious rule rests with the [a]gency."). No
justification supports the Commission tolerating this apparent gamesmanship."'
"' As the Commission knows, some SROs have reimposed "immediately effective" fee increases even
after a suspension order. In re BOX, Release No. 34-85459 (Mar. 29, 2019).
16
d. The Order could not adequately assess the Proposal's costs and benefits
without crucial fee and cost information. By withdrawing the fee portion of the rule in the face of
criticism, FINRA effectively conceded that it has not and cannot justify the fees on the record. FINRA
is trying to claim all the benefits and none of the costs of its new data service. For the Commission to
assess whether the asserted (though highly contested) benefits of the proposed rule would outweigh
the costs and competitive burdens, the Commission must at least estimate and analyze those costs.
Otherwise, this one-sided approach would deem any proposal a win. If SROs and agencies were
permitted to ignore regulatory burdens in this manner, agencies could propose laudable programs
heedless of their price tags, seek their provisional approval, and then—once established—propose a
fee that was by now necessary to sustain an already approved program. See, e.g., Bzrsinesr Roarndtable, 647
F.3d at 1148. rllong with crediting the alleged benefit of any expanded data access, it must take
account of its costs as well. Without that, the Commission cannot conduct a rational assessment
under clause (5), (6), or (9), or a rational cost-benefit analysis under section 3(~.
This is antithetical to the most foundational principles of administrative law and cost-benefit
analysis. That inconsistency is fatal to any effort FINR~1 might make to justify its charges. As in Ba~siness
Roundtable v. SEC, the Division's failure to "apprise itself—and hence the public and the Congress—
of the economic consequences of a proposed regulation" renders the Orderarbitrary and capricious.
647 F.3d 1144, 1148 (D.C. Cir. 2011) (citing ChamGer of Commerce v. SEC, 412 F.3d 133,144 (D.C. Cir.
2005)). And like Ba~sinesr Roarndta6le, here the Division has "inconsistently and opportunistically framed
the costs and benefits of the rule; failed adequately to quantify the certain costs or to e:~plain why
those costs could not be quantified; neglected to support its predictive judgments; contradicted itself;
and failed to respond to substantial problems raised by commenters." I~l at 1148-49.
***
17
Data fees for bond reference information is unquestionably an essential part of the FINR~
Proposal: FINRA itself said they were necessary "to meet ongoing operating costs." Initial Proposal at
13. The r'lmendment underscored that point; FINRc1 said it will not to implement the reference data
service until "after those fees are adopted." Amendment at 4. Yet as approved by the Division,
FINRr1's new rule states only that underwriters must provide data to FINR~1 (and, in the meantime,
prepare the infrastructure to do so, without knowing whether and when the service will take effect).
No one can access the data (the entire point of the Proposal) unless and until FINRA sets a rule saying
how that will happen and at what cost.
If FINRr1 will not implement the service yet anyway, there is no need to approve the Proposal
now in its provisional form. Given the volume of comments critical of FINRA's cost-plus pricing, it
is entirely plausible that the Commission could see a second proceeding and potential appeal
inextricably intertwined with this Order. r1t a minimum, therefore, the Commission should grant this
petition and hold the proceeding in abeyance pending submission of a fee proposal the Division deems
acceptable. At that time, the Commission will have a fully formed proposal before it. If, as the
Division apparently believes, fee information is necessary for assessing compliance of the rule with ~
15i~(b)(5), the Commission will then have that information. Until that time, however, the question
remains unripe, and the Commission has no need or basis to approve part of the program in advance.
FINRc1 has advanced no reason or precedent why the Commission can or should approve its Proposal
now that its fee component has been jettisoned until some unspecified time before the Proposal would
take effect. Response at 11-12."
" Regardless of any justifications for adopting this roundabout approach to fee filings by the not-for-
profit FINRi1 (which has articulated none), approving it would set a worrisome precedent that could
be exploited by other for-profit SROs filing fees under the same Rule 19 standards. See Peirce, The
Financial Industry Regulatory Authority: Not Self-Regulation after x111, Mercatus ~lorking Paper (Jan.
2015), available at https://ww~v.mercatus.org/system/files/Peirce-FINRrl.pdf (describing FINRA's
fF:3
2. The Order violated ~ 15A(b)(6) because the Proposal does not
promote equitable trade or foster cooperation in the handling of
market information.
FINRt~'s rules must "foster cooperation and coordination with persons" engaged in the
securities markets; "remove impediments to and perfect the mechanism of a free and open market
and a national market system"; and, "in general, ...protect investors and the public interest." 15
U.S.C. ~ 78o-3(b)(5). Unless the Corrunission affirmatively finds that an amendment accomplishes
these objectives, the Proposal "must be disapproved." 15 U.S.C. ~ 78s(C).
Bloomberg and other commenters raised at least four critical deficiencies of the Proposal
under ~ 15A(b)(6). FINRr~ failed to demonstrate a market failure limiting timely access to accurate
data; it failed to explain why its centralized data service, based on the error-riddled TRr~CE system,
would outperform market competition; it ignored data showing electronic trading is rapidly e:~panding
without regulatory intervention; and it failed to acknowledge the conflict between roles as a private
data vendor and public market regulator.''- In response, the Order asserted the Proposal would
"provid[e] all market participants with basic information concerning a newly issued bond," "improve
the corporate bond market's overall function by enabling a broader array of market participants and
service providers to engage in this market," and do so "on the day a newly issued corporate bond
begins trading in the secondary market." Order at 28. These high-level hopes are fit for Pollyanna, not
high revenues, balance sheet, and expenditures) ("Concerns about FINRr1's lack of accountability
loom even larger as FINRA seeks to regulate additional facets of the financial markets...").
'- Bloomberg presented data regarding alternative trading system ("t1TS") trading on pricing day to
show that electronic trading platforms can already readily access new issue bond reference data, and
that the market for new issue corporate bonds is healthy and evolving in the manner that FIMSr~C
desires. See Bloomberg Apr. 29 letter at 12-13. Data for new issues between March and April 2019,
moreover, demonstrates that ATSs arranged a trade in 43% of the new Jumbo-sized issues, 28% of
the new Benchmark-sized issues, and 11% of medium-sized issues on the day the bond was free to
trade. Id. In addition, over the past year, the number of Jumbo-sized new issues that traded
electronically on the day they were priced more than doubled. See Bloomberg July 1 letter at 4-6;
Bloomberg July 29 letter at 6; and Bloomberg Oct. 241etter at 4-5.
19
a public regulator. On each point, the Order rests on serious legal and factual errors that demand the
Commission's review.
a. No market failure justifying a coercive regulatory utility. Neither FINRA
nor the Order disputes the reality that multiple private-sector companies already provide FINRc1's
proposed "new' service: gathering information about new corporate bond issues, organizing the
information into useful databases, and distributing the information to users (especially bond traders).
These companies (like Bloomberg, ICE Data Services, Refinitiv, IHS Markit, and others, including
new entrants like DirectBooks13) are clearly "engaged in .. .processing information" regarding
securities transactions under ~ 15A(b)(6). The crucial difference between their service and FINRA's
proposal is that vendors obtain information through voluntary interactions in the marketplace, while
FINRr1 proposes to mandate that underwriters submit it in agovernment-mandated format at a
government-mandated time. FINRr1 therefore has the burden to prove—and the Division had to
determine—that FINRc1's coercive rule would appropriately cooperate and coordinate with (rather
than supplant) existing consensual data services.
Instead, the Order makes only a very limited claim: FINRc~'s outreach to anonymous, cherry-
picked market participants "lends credence" to its assertion that access to "accurate, complete, and
timely' data on the date of issuance "may be lacking." Order at 33. The Order includes no discussion
of whether and how existing data providers are already seeking to provide .the market with this data,
nor did it acknowledge how laying aquasi-public utility atop those services would "foster cooperation"
with them. The Order repeatedly asserts a purported need fora "uniform source" of accurate data,
but never explains why uniform (as opposed to accurate and accessible) data is necessary or desirable
in a competitive market. It never unpacks, for instance, why the interests of underwriters seeking to
13 See https://ww~v.businesswire.com/news/home/20191011005089/en/Global-Bank-Consortium-
Creates-Capital-Markets-Syndication.
sell newly issued bonds are not already aligned with the interests of vendors seeking to provide bond
information to the broker-dealers the underwriters want to buy those bonds.
1'11 that supports the Order's acceptance of FINRc1's purported "regulatory gap"' are
anecdotal comments from market participants, many of whom compete with Bloomberg's successful
data offerings. See Order at 33. These self-interested anecdotes, however, are not evidence that can
support reasoned agency decisionmaking.t' In Sarsgare~~anna, the D.C. Circuit invalidated the
Commission's approval of an SRO rule because of the Commission's "unquestioning reliance on [the
SRO's] defense of its own actions." 866 Fad at 447. As the court explained, the Commission cannot
"rely on statements by the self-regulatory organization," because there is "little supporting value in the
self-serving views of the regulated entity." Icl. (alteration and quotation marks omitted). The Division
reliance on FINRr'1's report of its "outreach" is exactly the same sort of error that the D.C. Circuit
criticized. That FINRc1 framed its position as a curated summary of "outreach" to preferred
respondents renders it no more reliable.
"The idea of a "regulatory gap" is misnomer. FINRr~ wishes to sell, not regulate, bond data. In any
event, merely noting the absence of a requirement that underwriters submit new corporate issue data
to a central source just begs the question. SeeAm. Egarity Life, 613 Fad at 177-78 ("[S]aying that there
was not a regulation in place ...cannot justify the adoption of a particular rule based solely on that]
assertion ....").
1i The Order treats FINRr~'s new data service as a "regulatory utility." The federal agencies that
regulate government-sanctioned utilities on a regular basis would not approve a new facility based on
the sort of speculation and second-hand anecdote that the Division considered sufficient. For
example, to obtain Federal Energy Regulatory Commission for a new gas pipeline, an applicant "must
submit evidence of the public benefits to be achieved by the proposed project." 88 F.ER.C. ¶ 61,227,
¶¶ 61,748, 61,750 (Sept. 15, 1999). "Vague assertions of public benefits will not be sufficient." Id.
21
b. The Order ignores recent data indicating electronic bond trading is
flourishing under the current regime. Indeed, the most recent data before the Commission (from
2019) indicates the bond-trading market is already headed in the direction FINR~ supports—without
its intervention. The Order's assertion that "many market participants . .. do not have accurate,
complete, and timely access" to new-issue information, Order at 27-29, is belied by unrebutted data
and reporting showing rapidly expanding electronic bond trading. The market's particular need for
data facilitating electronic trading was the principal justification for FINRr1's initial claim that an
information gap needed to be filled. E.g., Order at 11 & n.40. Yet data set forth by Bloomberg, based
on respected reporting and unrebutted by any data or evidence from FINRc1, shows that such trading
is already flourishing."' The Order allows FINRr1 to rely on opaque "outreach", anecdotes, and 2018
data to justify this rulemaking. These flaws demonstrate the value of the Commission's pursuit of
data-supported rulemaking." In this case, the 2019 data and reporting show a clear acceleration in the
marketplace toward electronic trading of new issues.
FINRr1 did not submit evidence showing that lack of access to data is impeding trading. At
best, it submitted a graph based on 2018 data purporting to show that most first-day trades do not
occur on r~TSs, a supposed fact that supposedly "suggests" a lack of access to new issue bond
'~ The Order offers no explanation of how its effort to supplant competition among bond-reference
data providers with a "regulatory utility" consisting of a "single source" for data, Order at 31, 53,
would serve FINR~1's mandate to "perfect the free and open market," ~ 15r1(b)(6).
" See generally U.S. Securities and Exchange Corrunission, "Our Goals" at Goal 3, available at
https://www.sec.gov/our-goals; see also Chairman Jay Clayton, "Testimony on Oversight of the U.S.
Securities and Exchange Commission' Before the United States Senate Committee on Banking,
Housing, and Urban affairs, available at hops://www.sec.gov/news/testimony/testimony-clayton-
2017-09-26 ("I believe that a thoughtful and methodical, data driven approach to market structure will
help us fulfill our mission to protect investors, maintain fair, orderly and efficient markets and facilitate
capital formation"); U.S. Securities and Exchange Commission, Press Release: SEC Proposes
Transaction Fee Pilot for NMS Stocks, available at hops://www.sec.gov/news/press-release/2018-43
(explaining that a rule proposal is "designed to generate data that will provide the Commission, market
participants, and the public with information to facilitate an informed, data-driven discussion.").
22
reference data. FINR.A Response at 6-7. Bloomberg demonstrated that FINR.A's analysis is
uninformative because FINRA used the wrong denominator, so that r~TS trading represents a
substantially larger proportion of first-day trading (in 2019, about 30% of first-day trades in issues
sizable enough for an electronic platform) than FINRr1 suggested. Bloomberg July 1 letter at 5. The
Order properly concluded that FINRc1's analysis—the only concrete evidence it offered—was "not
reflective of the market for newly issued corporate bonds as a whole." Order at 33 n.130. But the
Order offered no basis for rejecting Bloomberg's evidence from more recent data, showing that a
substantial and increasing amount of electronic bond trading occurs on the day of issuance, and
analysis from Greenwich Associates showing explosive growth and record high market share in ATS
electronic corporate bond trading overall."~ Regardless of whether this ATS evidence "reflect[s] ... the
market ... as a whole," such evidence directly rebuts FINRi1's central claim that growth in electronic
trading is hindered by a lack of essential access to bond reference data.
c. The Order fails to address inaccuracies in FINRA's current data. 'i'he
Order also made a critical factual error in its assessment of FINRc~'s plan to run its own data service.
The Proposal sought to give traders access to "reliable and timely" data. If FINRA's data service
proves less accurate than current offerings, however, then the whole exercise—with its attendant
disruption and cost to underwriters, traders, markets, and e:risting data providers—is for naught.
Bloomberg and other commenters submitted substantial and unrebutted evidence that
FINRr1's exisring data service, TRACE, features an unaccountably high error rate. Errors affect about
20% of the three entries reviewed in this far simpler system (the proposed system would feature more
than 30). See Order at 14 nn. 52-53 (citing comments and evidence, including Tabb Study ("An SEC-
'$ Kevin McPardand, New Issue and Volume Drop, E-Trading Hits New Record (Again) (Nov. 15,
2019), Greenwich Associates, available at https://~vww.greenwich.com/market-